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Hello downisland,

First of all let me tell you that I am not the best source to teach you anything about investing. Take my words with a grain of salt and if someone better offers you a different explanation, follow them.

"But isn't intrinsic value/fundamental value a sort of "liquidation price" concept ie: what would we get if we sold the parts of the business seperately (the real estate, the cash flow, the equipment) and therefore shouldn't the intrinsic value of a company be discounted quite a bit? Once people know you are liquidating??" (emphasis mine)

Not necessarilly. In fact in many cases IV is not only the liquidating value. The latter is just a kind of absolute bottom, a minimum (If nothing else works, what is the minimum amount I will be able to pull out of this business?) This is the most useful function of liquidation value imho, to be used as a yardstick.

In reality people often buy businesses in order to benefit from their operations, not simply to close them down. In that case the buyer will probably calculate what price he would pay, based on the expected profits of the business. IV is simply the answer to the question "how much this business is worth?", covering any of the following: is worth to whom, is worth as total, is worth as parts etc

If it helps you think the example of the intrinsic value of a used vehicle.
Sometimes the vehicle is still functional for its initial purpose (i.e to be used for transportation) and people who consider buying it will calculate its price based on this functionality and will keep using it for their transportation needs.
Sometimes the vehicle will be in such crappy condition that one would only buy it with the purpose to break it down and start selling the separate parts (liquidate it, since the vehicle no more will exist for transportation purposes).
Other times the vehicle will have a limited functionality, e.g any buyer won't be able to use it to drive it from LA to NYC but it might be fine for transportation in some limited local range.
In some cases, the vehicle will not have anymore a "value as transportation means" but a buyer would still not "liquidate it" (break it apart and selling it as parts) because it would have an "antique" value. [people rarely would buy a business to keep it as antique but a similar situation would be people buying a "dead" operationally business in order to take control of famous brand names etc]

Usually the liquidation value would be the lowest of all but even there one could see exceptions. In the business world such an exception would be the case of a business with some "healthy" assets being locked inside an "unhealthy" operation (e.g. a retail operation losing money but owning real estate of big value); here it would make sense to separate the components and sell them apart hoping to untap the previously locked value and expecting that the price of the separate parts would be higher than the price of them as combo. Such scenarios do not occur very often.

Keep in mind that for a passive, minority, outsider shareholder with "average" abilities situations where he buys in order to profit from liquidation of the business can be problematic and more difficult than more "casual" stock picking. They require him to fully trust a management team outside his control plus they can require him a higher than usual level of expertise to spot such opportunities (they are usually found in problematic businesses and one should be able to distinguish wheat from the chaff) On top of it your competition will be full of experts.

Practically, if one tries to find only those businesses selling below liquidation value, he would restrict unnecessarily the universe of potential buys; there are many businesses of high quality that almost never sell below liquidation, why exclude them from your purchases even when they are undervalued? To paraphrase something that Munger and Buffett have said, it is often better to buy very good businesses at mediocre prices (i.e above liquidation value) than looking for mediocre businesses at very good prices. Time can work against the investor in the second case and surprises for the latter category are usually unpleasant.


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